Foreign Direct Investment: A Case Study of Nestle S.A.

in
Nigeria
Nestle S.A. is a Swiss multinational food and beverage company which has its
headquarters in Vevey, Switzerland. The company was established in 1905 by the
merger of the Anglo-Swiss Milk Company and Henri Nestlé’s Farine Lactee
(Nestle Nigeria (2016). Its operations involve the production and processing of
baby food, coffee and tea, dairy products, confectionary, bottled water, snacks,
frozen food and ice cream. It has grown significantly over the years. When measured in
terms of revenues, the company is considered the world’s largest food company.
It has subsidiaries in over 86 countries of the world and has over 330,000 employees. 44 per
cent of its sales are in the Americas, 28 per cent in Europe and 28
per cent in Asia, Oceania and Africa. This study is based on one of its subsidiaries in Africa;
Nestle Nigeria PLC.
At the beginning of the 20th century, Nestle S.A. started selling its products in
Nigeria through local importers that placed their orders directly with the actively
trading British companies in Nigeria (Nestle Nigeria (2011a). Initially, exports
were sporadic but from the 1920s, they became regular. It was during this period
that Nestle S.A. decided to establish its office in Nigeria to organize the
importation and distribution of its products in the country. In 1961, Nestle
Products Nigeria Limited was officially created and so, the first phase of Nestle
S.A.’s operations in Nigeria began as a wholly-owned subsidiary of Nestle Holdings Limited.
With the steady increase in sales, Nestlé’s industrial presence in Nigeria began in 1971
when the company was encouraged to begin producing part of its bouillon cubes
at the Ilupeju factory.
Nestle Nigeria was established in 1961 as a part of Nestlé S.A’s Central and West
Africa Region (CWAR) and it began production activities in 1971 at its headquarters in
Ilupeju, Lagos. From that time, Nestle has expanded its operations to
other Southwestern regions in Nigeria. In 1981, it began its operations at its factory in
Agbara, Ogun State, Nigeria and during the following years, Nestle
added major extensions to this factory in pursuit of efforts to locally source
raw materials. By 1991, the company changed its corporate name to Nestle
Foods Nigeria PLC it was almost completely integrated into the local economy as most of the
raw materials and nearly all the packaging materials were
sourced domestically. By 1995, Nestle commissioned another factory in Agbara and the agro-
allied factory was conceived as a regional production centre for the production of an
essential ingredient in the manufacture of Nestlé’s range of culinary seasonings.
The number of employees yearly employed by Nestle Nigeria also increased. In 2003,
Nestle Nigeria’s workforce force comprised 1164 employees but today, the number
of employees has increased to about 3300. Sales also increased as the company
expanded its operations in the Nigerian market. In 1999, the company recorded
sales of N7,725,000 (about $51,500) but by the year 2013, the company recorded
sales of N133,084,000 (about $831,775).
Apart from the steady increase in sales, some of the other factors that encouraged Nestlé’s
Industrial presence in Nigeria include; the favourable demographics
of the Nigerian market that provides sustainable demand for Nestlé’s products, the
stability of Nigeria’s currency, the purchasing power of the Nigerian population,
the petroleum boom in Nigeria in the 1970s, the increasing population of the
the country that showed the existence of a large market for consumer goods coupled
with the increasing adoption of the Western diet and the nature of Nestlé’s products.
The Nestle S.A. management in Vevey decided to integrate its activities gradually into the
Nigerian economy to progressively substitute imported goods with locally produced goods.
Also, based on the proximity-concentration trade-off, it was more profitable for Nestle to
invest in Nigeria as the gains from avoiding trade costs outweighed the costs of maintaining
capacity in the Nigerian market.
Nestlé’s presence in Nigeria has resulted in multimillion naira investments with
the construction of ultra-modern plants and distribution centres at several locations in
Nigeria. The plant at Sagamu is the largest in the Asia, Oceania and
Africa region in terms of the production of bouillon cubes. The company’s
presence has supported the increase in living standards through employment
generation and infrastructure improvements.
Nestle provides consumers with a wide variety of nutritious products that are readily
available at reduced costs relative to the costs of importing these goods. Through its creation
shared value scheme, Nestle implements nutrition education programs to promote good
nutrition practices among consumers. The Company reaches out to its
local suppliers of inputs by organizing various programs through which they
provide advisory services on farming practices, harvesting techniques and other
crop-handling processes. Through these programs, the company has helped improve the
livelihood of the local farmers for the production of its food and beverage products. Through
its presence and operation in Nigeria, it has contributed to the growth of GDP and has been a
source of tax revenue.
At Nestle Nigeria, the few workers that are employed as skilled labourers are highly paid
when compared with the workers in the local companies and this serves as a means of
preventing local firms from hiring Nestle staff. A study Led by Doyin Soyibo (an economist
and dean of the Faculty of Social Sciences at a University in Nigeria), discovered that Nestlé
employees earn more than the average workers in the manufacturing industry and their
salaries increase faster than the industry norm. More than 75 per cent of the workers said
that if given the choice to change jobs, they would decline.

Nestle benefited from the granting of re-investment allowance and Export Incentives. Some
factors have limited the rapid growth and expansion of Nestle Nigeria including the Volatility
of the Nigerian currency; Competition with local firms and other multinationals in the
industry; Poor state of infrastructure, and Changing government policies. Despite all these
factors, Nestle Nigeria has thrived and has experienced growth through the years.
Modes of Entry Cases

General Motors and Shanghai Automotive Industry Corporation (SAIC) -

Equity joint venture
Background: In 1997, General Motors, one of the world's largest automobile manufacturers,
entered into a joint venture agreement with Shanghai Automotive Industry Corporation, a
major Chinese state-owned automotive company. The partnership aimed to tap into the
rapidly growing Chinese automotive market, which was experiencing surging demand for
vehicles due to rising incomes and urbanisation.
Mode of entry: The joint venture between GM and SAIC served as their mode of entry into
the Chinese automotive market. Instead of GM establishing its operations independently in
China, it chose to collaborate with SAIC, forming a new entity known as Shanghai General
Motors (SGM).
Reasoning:
•Access to the local market: Partnering with SAIC provided GM with access to the Chinese
market, which had strict regulations favouring domestic companies. By forming a joint
venture with a prominent Chinese automotive player like SAIC, GM could navigate
regulatory hurdles, secure government approvals, and establish a local manufacturing
presence more efficiently.
•Sharing of resources: Establishing a presence in China required significant investments in
manufacturing facilities, supply chain networks, and distribution channels. By forming a joint
venture, GM and SAIC could share the financial burden and leverage each other's resources,
expertise, and market knowledge to accelerate growth and mitigate risks
•Technology transfer: The joint venture facilitated the transfer of automotive technology and
know-how from GM to SAIC, contributing to the development of China's domestic
automotive industry. Additionally, GM benefited from SAIC's understanding of the local
market dynamics, consumer preferences, and regulatory environment, enhancing its
competitiveness in China.
Implementation:
Shanghai General Motors (SGM) initially focused on producing and selling passenger
vehicles under the Buick, Chevrolet, and Cadillac brands tailored to the preferences of
Chinese consumers. The joint venture invested in state-of-the-art manufacturing facilities,
research and development capabilities, and a nationwide sales and service network to provide
its operations in China.
Results:
The GM-SAIC joint venture has been highly successful, making significant contributions to
both companies' growth and profitability in the Chinese market. SGM became one of the
leading automotive manufacturers in China, consistently ranking among the top-selling
brands in the country. The joint venture has expanded its product portfolio, manufacturing
capabilities, and market reach over the years, solidifying GM's position as a key player in
China's automotive industry.
Starbucks in China- Wholly owned subsidiaries
Background: Starbucks, the American coffeehouse chain, entered the Chinese market in
1999. China represented a massive opportunity due to its large population and rapidly
growing middle class with increasing disposable income. However, entering China posed
significant challenges due to cultural differences, local competition, and regulatory
complexities.
Mode of entry: Starbucks chose to establish wholly owned subsidiaries as its mode of entry
into China. Rather than franchising or forming joint ventures, Starbucks decided to directly
own and operate its stores in China.
Reasoning:
•Control and quality: By opting for wholly owned subsidiaries, Starbucks could maintain
complete control over its operations, ensuring consistency in product quality, service
standards, and brand experience across all stores
•Brand image: Owning its stores allowed Starbucks to maintain its premium brand image in
China. It could control every aspect of the customer experience, from store design to
employee training, ensuring that it aligned with its global brand identity.
• Long-term strategy: Starbucks viewed China as a strategic market for long-term growth. By
establishing wholly owned subsidiaries, the company could make significant investments in
infrastructure, marketing, and talent development, positioning itself for sustainable success in
the Chinese market.
Implementation: Starbucks initially faced challenges in navigating China's business
environment, including bureaucratic hurdles, cultural differences, and local competition.
However, the company gradually expanded its presence by opening flagship stores in high-
traffic locations, investing in localized marketing campaigns, and adapting its menu to suit
Chinese tastes.
Results: Over the years, Starbucks' wholly-owned subsidiaries in China have flourished. The
company has become one of the leading coffee chains in the country, with thousands of stores
across hundreds of cities. Its success in China has not only contributed significantly to its
global revenue but also served as a model for other multinational companies entering the
Chinese market.
Toyota branch office in the United States- branch office
Toyota, the Japanese automotive giant, established branch offices in the United States to
facilitate its expansion into the American market. By setting up branch offices in major cities
like Los Angeles, New York, and Chicago, Toyota was able to better understand local market
demands, build relationships with dealerships, and provide localized customer support. This
approach helped Toyota become one of the leading automobile manufacturers in the US.
Starbucks: A Tata Alliance- Strategic Alliance
In January 2011, TATA Coffee and Starbucks Corporation announced their plans for opening
Starbucks outlets in India.
The Joint Venture is a 50:50 partnership between both companies. On 19 October 2012,
Starbucks opened its first store in India, measuring 4,500 sq ft in Elphinstone Building,
Horniman Circle, Mumbai.
Starbucks is a quality-driven organization and the same is TATA. Both are very reputed
companies and are the leaders in their industries.
But in a Joint venture, a company is very thoughtful while selecting its partner where both
can benefit from each other’s strengths.
Due to the Joint venture, Starbucks Corporation, TATA Group, and the Indian Consumers
benefit a lot in the following ways.
Benefits of Starbucks
Exposure to a large Indian market.
Decrease its dependence on its primary US market.
Availability of high-quality Arabica coffee by TATA Coffee.
Benefits of TATA
The deal allowed TATA Coffee to provide roast coffee to Starbucks.
Growth opportunity in international markets due to the Starbucks network.
TATA became Asia’s biggest publicly traded coffee grower.
Benefits of India
The company employed a large number of people across India.
Growth in demand and sustainability of India’s Arabica coffee.
Indian consumers got a taste of foreign brands blended along with the taste of India.
International Ventures
The Tata Group and Starbucks Corporation have also collaborated on many ventures outside
India.
Starbucks Reserve Tata Nullore Estates is the first-ever Starbucks Reserve coffee which is
sourced exclusively from India and became the first Indian coffee to be roasted and sold in
Seattle in 2016. The coffee was later rolled out across Starbucks outlets in the United States.
In the same year 2016, Starbucks began selling Himalayan bottled mineral water at its outlets
in Singapore and also began retailing its products onboard all flights of Vistara which is a
joint venture between the Tata Group and Singapore Airlines.
Features
All the espressos sold in Starbucks’s Indian outlets are provided by TATA Coffee.
According to the part of the deal, Starbucks and Tata Coffee Limited will work toward
developing and improving the profile of Indian-grown Arabica coffees around the world by
elevating the level of Indian coffee.
The Joint Venture company will also work on improving the quality of coffee through
sustainable practices and advanced agronomy solutions.
Sony Ericsson- Cooperate Joint Venture
Sony Ericsson is a joint venture of Sony and Ericsson which took place on October 1st, 2001.
They start to work together because they want to become a communication entertainment
brand, by inspiring people to do more than just communicate and enabling everyone to create
and participate in entertainment experiences.
sony: It's a Japanese multinational company, and it’s one of the leading manufacturers of
electronics, products for the consumer and professional markets. It is a leading manufacturer
of audio, video, game, communications and information technology products for the
consumer and professional markets. Sony is uniquely positioned to be a leading personal
broadband entertainment company in the world.
Ericsson: Ericsson was founded in 1876 by Lars Magnus from Sweden. He started making
phones with the potential of improvements in technology
The main reason for the venture was to integrate Sony’s consumer electronics expertise with
Ericsson’s technological knowledge in the communications sector. Ericsson was buying chips
from a single source, Philips. A fire erupted causing a huge loose at Philips, due to which
Philips was unable to provide the chips to Ericsson. Ericsson faced a huge loss due to this
incident. There were rumours that Ericsson might sell its handset division but it found a way
to join hands with Sony which could help it to recover.
Resource-based view is another factor that motivates Sony and Ericsson to make a joint
venture. According to this point of view, firms make alliances because of tangible and
intangible valuable resources this creates a unique competitive edge in the industry that
couldn’t be imitable by any other competitor; this could also help for the improvement of
performance. Sony wanted technical know-how of communication technology from Ericsson
and Ericsson wanted new technology from Sony that would help them in the market
competition, that’s why they start work together and make combination of both company
technologies.
Sony Ericsson’s strategy was to release new models capable of digital photography as well as
other multimedia capabilities such as downloading and viewing video clips and personal
information management capabilities.
When they started as Sony Ericsson company they released many models which were new
and innovative mobiles, The main features of those mobiles were digital photography,
downloading facilities etc.
PROBLEMS THE JV HAS ENCOUNTERED SINCE THE FORMATION
The joint venture faced losses at the start, and their targeted date of making a profit was
shifted from 2002 to 2003. They couldn’t fight the main competitors of the mobile phone
manufacturing industry and came to fifth position in the market.
The main problem they were facing was that they could not cater to different markets
effectively, because after making a joint venture they started working without getting to know
what real customer needs and wants are. So due to this lack of information, their products
started facing losses and then they had to remove their product line from the market.
Another problem they were facing was they invested a lot without getting to know what
market situations nowadays are. Like in 2003 mobile phone prices started declining but still,
Sony Ericsson was making expensive mobiles, due to this they couldn’t make as much profit
as they were expected
They were not providing the advanced versions of mobiles as early as other competitors of
mobile phone manufacturing were providing. Their R&D was slow as compared to other
mobile phone manufacturers.
They were providing innovative products but the marketing strategy was not as effective as
they could attract customers.
This joint venture was also not as successful because Sony wanted results as early as possible
and Ericsson was not making profits as per expectations, so due to this they started to cut the
number of jobs and also removed the Research and Development departments which were
working globally, due to this they couldn’t make innovative products according to customer
needs.
Unilever Group- Umbrella Holding Company
Unilever is a multinational consumer goods company based in the Netherlands and the UK. It
operates through a decentralized structure with multiple subsidiary companies organized
under an umbrella holding company. Each subsidiary operates independently in different
regions and markets, allowing Unilever to adapt its products and strategies to local
preferences and market conditions. For example, Unilever has separate subsidiaries for its
food and beverage brands, personal care products, and home care products, each of which
manages its portfolio of brands and operations. This decentralized structure has enabled
Unilever to effectively penetrate diverse international markets while leveraging its global
scale and resources.

DRAWBACKS OF FDI(Cases)
The potential negative consequences of government incentives for attracting foreign
companies:
Exploitation of Labor and Resources:
Vietnam: A developing nation that has attracted a lot of foreign investment in manufacturing,
but faces concerns about labour practices and environmental impact.
1. The Garment Industry Boom in Vietnam: A Case Study of FDI Support and its
Drawbacks

Introduction: Vietnam's economic rise in recent decades owes much to its aggressive
strategy of attracting Foreign Direct Investment (FDI) in the garment industry. However, this
success story also presents a case study of the potential drawbacks of overreliance on FDI
support. This analysis examines both the benefits and downsides of Vietnam's garment
industry boom.

The Rise of a Garment Giant:

● FDI Incentives: Vietnam offered attractive tax breaks, simplified regulations, and
investment in industrial zones to lure foreign garment companies.
● Rapid Growth: The garment industry became a major export earner, reaching over
$40 billion in exports in 2022 (General Statistics Office of Vietnam).
● Job Creation: The sector employs over 2.5 million people, mostly women (ILO,
2023).

The Darker Side of the Boom:

● Labor Exploitation: Reports persist of low wages, long working hours, and unsafe
working conditions in garment factories (Human Rights Watch, 2023).
● Environmental Impact: The industry contributes to significant water pollution from
dyeing processes and waste generation from textiles (World Bank, 2022).
● Limited Technology Transfer: Foreign companies may not share advanced garment
manufacturing technologies with the local workforce, hindering long-term
development.
 ● Laws and Policies Contributing to Drawbacks:
● The Law on Foreign Investment (2020): While streamlining FDI processes, it
doesn't adequately address labour rights or environmental concerns within foreign-
owned companies.
● The Labor Code (2019): While establishing minimum wages and working hour
limits, enforcement remains weak, leading to exploitation (US Department of State,
2023).

2. A Deeper Dive: The Drawbacks of FDI Support in Mexico's Manufacturing

Boom

Introduction:

Mexico's aggressive pursuit of Foreign Direct Investment (FDI) in manufacturing has

undeniably fueled economic growth. However, this strategy has come with drawbacks that
warrant closer examination. This case study analyzes the downsides of Mexico's FDI
reliance, drawing on specific data, laws, and policy examples.

Benefits and Drawbacks: A Statistical Look

● Job Creation: FDI has created jobs, with the manufacturing sector employing over
8.5 million people (INEGI, 2023). However, wages remain low, averaging around
$7.25 per hour (SHCP, 2023).
● Export Boom: Mexico is a global leader in automotive exports, with over $80 billion
exported in 2022 (UN Comtrade). However, this dependence on a few sectors makes
the economy vulnerable to external shocks.
● Uneven Development: The benefits are concentrated in northern border states like
Chihuahua and Nuevo León, while southern states lag in development (World Bank,
2023).

Specific Laws and Policies Contributing to Drawbacks:

● The Maquiladora Industry and the Maquiladora Decree (1989): This legislation
simplified regulations for foreign-owned assembly plants, attracting FDI but also
leading to concerns about low wages and limited technology transfer.
● The North American Free Trade Agreement (NAFTA): NAFTA (now USMCA)
promoted free trade between Mexico, the US, and Canada, but critics argue it
discouraged domestic investment in non-export sectors.

Environmental Impact:

● SEMARNAT (Secretaría de Medio Ambiente y Recursos Naturales): Mexico's

environmental agency struggles to enforce regulations, with maquiladoras often cited
for water pollution and air emissions (OECD, 2022).
● Deforestation: Rapid industrial expansion contributes to deforestation, particularly in
northern regions (INEGI, 2021).
 3. The Irish "Celtic Tiger": A Case Study of FDI Support and its Drawbacks

Ireland's economic transformation in the late 20th and early 21st centuries, nicknamed the
"Celtic Tiger," is often attributed to its aggressive strategy of attracting Foreign Direct
Investment (FDI), particularly in the technology sector. However, this success story also
presents a complex case study with drawbacks arising from its FDI-centric approach.

The Rise of the Tech Hub:

● Tax Incentives: Ireland offered a highly competitive corporate tax rate of 12.5%,
significantly lower than most developed economies.
● Skilled Workforce: A well-educated workforce and government investment in
research and development attracted multinational tech companies.
● Economic Boom: Ireland became a global hub for tech giants like Apple, Google,
and Facebook, experiencing rapid economic growth and job creation.

The Other Side of the Coin:

● Loss of Corporate Tax Revenue: The low corporate tax rate led to accusations of
Ireland being a "tax haven," depriving the government of potential revenue for social
programs and infrastructure.
● Limited Knowledge Transfer: Critics argue that multinational companies may not
fully share advanced technologies with the Irish workforce, hindering long-term
technological development.
● Housing Crisis: The influx of high-paying tech jobs fueled a housing crisis, with
rapid rent increases and limited affordable housing options.
● Income Inequality: The benefits of the tech boom may not have trickled down
equally, exacerbating income inequality between highly skilled tech workers and
other sectors.

Laws and Policies Contributing to Drawbacks:

● The Corporation Tax Act (2016): While amended slightly in recent years, the low
corporate tax rate remains a central pillar of Ireland's FDI strategy.
● The Industrial Development Authority (IDA): This government agency actively
courts foreign investment, but may not adequately consider the broader economic
and social impacts of such investments.

4. A case study that highlights some drawbacks of Foreign Direct Investment

(FDI) involves the impact of FDI in the retail sector in India.

Case Study: FDI in the Indian Retail Sector

Background:
In 2012, the Indian government announced a policy to allow up to 51% FDI in multi-brand
retail and 100% FDI in single-brand retail with certain conditions. This decision aimed to
attract foreign investment, modernize the retail sector, improve supply chain efficiency, and
create employment opportunities. However, the policy faced significant opposition from
various stakeholders, including small traders, local retailers, and political parties, who raised
concerns about its potential negative consequences.

Drawbacks:

● Displacement of Small Retailers: One of the main concerns raised by opponents of

FDI in retail was the potential displacement of small retailers and traditional mom-
and-pop stores. Foreign retail giants, with their vast resources and economies of
scale, could potentially undercut small retailers on pricing, leading to their closure or
loss of market share.
● Loss of Cultural Identity: Traditional markets and neighbourhood stores are often
seen as integral parts of India's cultural fabric, providing unique shopping
experiences and fostering community cohesion. The dominance of large foreign
retailers could lead to the homogenization of retail environments, eroding the
distinctiveness of local markets and undermining cultural heritage.
● Political Opposition and Policy Uncertainty: The controversy surrounding FDI in
retail generated significant political opposition, leading to policy uncertainty and
delays in its implementation. This uncertainty could deter potential investors and
undermine confidence in the government's commitment to economic reforms.
Moreover, frequent changes in policy and regulatory frameworks can create
challenges for businesses in planning and decision-making.